Chapter_02 - Instructors: Please do not post raw PowerPoint...

Info iconThis preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon
Click to edit Master subtitle style Chapter 2 Fundamental Principles of Measuring and Managing Value Instructors: Please do not post raw PowerPoint files on public website. Thank you!
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Session Overview Traditional rules of thumb about valuation can be misleading , and in some cases harmful. We start our discussion by demonstrating why EBITDA and earnings per share (EPS) often fail to measure value. In the second part of our discussion, we demonstrate how the value of a company can be traced to four key value drivers: core operating profit, return on capital, cost of capital, and organic revenue growth. Value creation and the practice of finance are about trade-offs . Although an action can lead to an improvement in one metric (such as worker productivity), it may have an adverse impact on other metrics, such as growth or capital required. Every business, product category, customer group, and channel must be thoroughly evaluated for the potential of growth and profitability. 22
Background image of page 2
Accounting Earnings, EPS, etc. Popular press and the board room often focus on accounting earnings, and improvement of accounting earnings Earnings do not equal cash flows for all the reasons we’ve talked about in the past Non-cash items including depreciation, interest payments, taxes not related to operations, accruals
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 4
55 Operating Profit and Free Cash Company A earns $100 million a year in after-tax profit. Part of the profit will be reinvested in the business, the remainder distributed to investors. EBIT(1 − T) = $100 Reinvest ed in business Returned to investors $5 0 $5 0 Investment Rate (IR) = 50% Payout Rate = 50% Financial Terms EBITDA = $180 $8 0 Paid in taxes
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
66 Operating Profit and Free Cash Flow The company plans to reinvest $50 million at a 10 percent rate of return. This investment leads to an extra $5 million in profits. For simplicity, we assume all ratios, the investment rate, and so on never change. Company A (Volume Inc in the text) Investment rate (IR) 50 % Return on new investment 10 % Growth in profits 5 % Yea r 1 Yea r 2 Yea r 3 After-tax operating profit 100 .0 105 .0 110 .3 Net investment (50. 0) (52. 5) (55. 1) Free cash flow 50 .0 52 .5 55 .1
Background image of page 6
77 Which Company Is Worth More? Both Company A (Volume Inc) and Company B (Value Inc) currently generate $100 million in profit and are expected to grow profits by 5 percent. If both companies have 100 million shares outstanding, what would each company’s EPS and EPS growth rate be? Company A
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 8
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 06/06/2011 for the course FINA 4210 taught by Professor Staff during the Spring '08 term at University of Georgia Athens.

Page1 / 35

Chapter_02 - Instructors: Please do not post raw PowerPoint...

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online